Fox Chase Cancer Center’s soon-to-be-completed merger into the Temple University Health System will satisfy the oncology institution’s long-sought desire to expand, but court records filed in connection with the affiliation show how the marriage was precipitated by the implosion of what once was one of Wall Street’s largest investment banking firms.

In December, the two organizations signed an affiliation agreement under which Philadelphia-based Fox Chase, a National Cancer Institute-designated cancer center, would become part of the Temple Health System.

Under the terms of the agreement, Temple will use part of a planned $318.2 million bond offering to pay off at a discounted rate about $84 million in debt owed to Fox Chase lenders. The Philadelphia Orphans Court, which oversees nonprofit organizations, approved the agreement last week.

Documents filed by Fox Chase in support of the Temple affiliation told how the need to find a “strategic partner” was accelerated by the collapse of Lehman Brothers in 2008. That collapse, Fox Chase noted, caused a swap transaction it was involved in to “lose value to the point where the swap counterparty had the right to terminate the swap transaction.”

Dr. Michael V. Seiden, the president and CEO of Fox Chase, said a portion of the proceeds from a $125 million bond issue that funded a hospital building project went into what is known as a “hedge total return swap.” The amount was not disclosed. The funds used for the swap, Seiden explained, would become an asset if interest rates — 4.5 percent at the time of the bond sale in 2007 — went up, but a liability if the rates went down.

“Interest rates were historically low,” Seiden said. “It was reasonable to believe interest rates would go higher, but then you had the Lehman Brothers and Bear Stearns collapse and the strategy of the central bank (the Federal Reserve) to protect the economy was to push interest rates down to near zero percent. Our swap became a liability. What made it so challenging is all of this wasn’t spread out over a year. It all happened very quickly — in the course of a month or so.”

Orphans Court filings provided the following account of the events that led the 108-year-old, 100-bed cancer hospital to give up its independence in order to remain viable:

While the Philadelphia region experienced a rapid consolidation in the 1990s as medical centers banded together to better negotiate contracts with managed-care organizations, Fox Chase Cancer Center was able to remain a freestanding entity based on “favorable Medicare reimbursement (rates), a respectable charitable endowment” and a recurring core grant from the NCI.

Still, the cancer center saw it would need to grow to remain competitive. By license, it was limited to 100 beds, and most of those were in semiprivate rooms in an “aging inpatient facility.” The hospital had no room to convert to the “industry norm” of private rooms.

In 2003, Fox Chase leadership began exploring three options: finding a way to expand at its current campus, relocating to a new site or adopting a dual campus model with research at one site and patient care at another. Two years later, the cancer center unveiled an ambitious 25-year, $1 billion expansion plan that including taking over about 19 acres in the neighboring Burholme Park. Fox Chase officials worked out a land swap and lease deal with the Fairmount Park Commission, approved by City Council in 2008, to acquire the land in exchange for property the hospital had acquired elsewhere in the city. A group of Burholme Park residents sued to block the deal. After two years of legal battles, the expansion plan was thwarted.

Court records noted the Burholme Park’s legacy is Fox Chase Cancer Center’s “hallway to nowhere,” built to connect its cancer pavilion completed in 2010 to future clinical space planned for subsequent phases of the expansion that would have included the park property.

Seiden said Fox Chase did have discussions that went “pretty far” with the state of Delaware about a possible move, but ultimately the cancer center was concerned Delaware’s size would not generate the volume of cancer patients needed to support its dual research and patient-care missions.

The September 2008 collapse of Lehman Brothers occurred at the same time Fox Chase was in court with the park neighbors over the expansion plan.

That event sets off a domino effect in which Fox Chase received reservation of right letters, a form of a default notice, first from its unidentified credit swap counterparty and then, by March 2009, all of its senior lenders — whom collectively were owed $180 million. Its creditors included Citizens Bank, TD Bank, Wells Fargo and J.P. Morgan. To make matters worse, the cancer center’s line of credit was terminated, blocking access to working capital. Fox Chase was already struggling with a decline in charitable contributions and a drop in the value of its endowment because of the country’s economic turmoil.

Fox Chase ended its fiscal 2009 with an operating loss of $11.4 million and a net loss, including non-operating activities, of $52.4 million.

Over the next two years, Fox Chase would meet repeatedly with its lenders to discuss debt repayment. An initial forbearance agreement negotiated in August 2009 including a provision requiring it to bring in outside consultants to explore strategies to improve business operations.

“It became apparent Fox Chase’s recovery would be a long slow climb,” the hospital noted in the court filing. “With the credit markets essentially closed in 2010 and with no ability to leverage the value of its campus, Fox Chase recognized it had no ability to finance with a new lender.”

The cancer center’s last option was a “strategic alignment” with a larger health system. Temple Health was a natural choice given that one of its medical centers, Jeanes Hospital, is connected to the Fox Chase campus by a footbridge and it had the space the cancer center could use to expand.

The two organizations began discussions. A letter of intent for an affiliation was signed last summer. Fox Chase returned to profitability in fiscal 2011 with a net income of $3.7 million. The two organizations finalized their affiliation agreement, subject to needed regulatory approvals, on Dec. 15. The agreement is expected to take effect July 1.

The bonds Temple is issuing, part of which will be used to complete the deal, received mixed scores in May from the rating agencies. Standard & Poor’s and Fitch both giving the bond issue BBB- grades, while Moody’s gave it a “Ba1” score, its highest “junk” bond rating. In addition, Fitch and Moody’s gave the health system “stable” rating outlooks, while Standard & Poor’s issued a negative outlook.

Moody’s analysts noted the affiliation with the Fox Chase Cancer Center brings the Temple health system a “clinically renowned institution; though Fox Chase does not bring liquid assets to the relationship” — which will result in diluting Temple’s balance sheet.

Dr. Larry Kaiser, president and CEO of the Temple health system, said the bed count for Fox Chase will remain the same. Because it specializes in cancer care, the hospital was able to get a waiver from Medicare’s prospective payment system — which assigns payments based on patients’ diagnoses. If it were to exceed 100 beds, Kaiser said, Fox Chase would lose the waiver that pays it per diem rates.

“The difference [in payment rates] is significant,” he said.

Correction/Clarification

The original version of this story had the incorrect first name for Dr. Michael V. Seiden.